Planning and understanding
your pension

Thinking about your pension can be useful whatever your age. If you’re affected by cancer, you may want to claim money from your fund now.

State Pension can only be claimed once you reach a certain age. But you may be able to draw from workplace or personal pensions early. This could provide extra income, a lump sum, or both.

If you can’t work because of your cancer, it’s worth checking whether this is affecting your pension contributions. You may qualify for national insurance credits that count towards your state pension. Talk to your provider to check the value of your contributions. You may also want to find out about how your pension fund can be paid to people close to you if you die. Your surviving husband, wife or civil partner may be eligible for bereavement benefits.

Some providers offer impaired life annuities. These pay more to people with certain health problems including cancer. It’s important to shop around for the best deal.

Since 6 April 2015, the rules about personal pensions (and some types of workplace pensions) have changed. These changes to ‘defined contribution schemes’ give people aged over 55 more freedom over how they save, invest or spend their pension benefits. We are currently updating the details on this page. In the meantime, you can visit pensionwise.gov.uk to find out more about these changes.

State pension

Most people can claim a State Pension once they reach State Pension age.

The State Pension age for men is currently 65.

The State Pension age for women is currently between 62 and 65. The exact age depends on when you were born, because the State Pension age for women is gradually rising to match the age for men. By 2020 the State Pension age for everyone will increase to 66, and this will continue to rise in stages until it is 68.

It’s important to start thinking about your State Pension early. Even if you’re many years below pension age, it could be helpful to know now when you are likely to reach Basic State Pension age. You can get an idea of how much State Pension you may get by visiting gov.uk/calculate-state-pension or by calling the UK Government’s Future Pension Centre on 0845 3000 168.

Who gets state pension?

The State Pension is currently made up of two main parts: Basic State Pension and Additional State Pension. This is due to change soon (see ‘The new single-tier State Pension’ below).

Under the current rules, you can get Basic State Pension when you reach State Pension age and you have at least one qualifying year. Qualifying years are built up through paying national insurance contributions, or through credits that are given when you can’t work. To get the full Basic State Pension you need 30 qualifying years.

Depending on your national insurance contributions and what benefits you’ve claimed, you may also be eligible for Additional State Pension. This gives you extra money on top of your Basic State Pension. You won’t have built up any Additional State Pension for periods that you self-employed.

The new single-tier state pension

The government has announced that for people reaching State Pension age from 6 April 2016 onwards, the two parts of the current State Pension will be replaced by a new single-tier State Pension. State Pension you’ve already built up under the old system will still be protected. The aim is to simplify the State Pension. The change will mean that people will eventually need more qualifying years than they do now (expected to be 10). The number of contribution years needed to get the full State Pension will also increase from 30 to 35 years.

There will be certain transitional arrangements for people who have entitlement under the current rules but reach their State Pension age under the new rules.

Protecting your right to state pension

There may be times when you don’t pay national insurance, for example, because you’re off work sick, unemployed or not earning enough. In these situations, you usually continue to get national insurance credits. These cover the contributions you were unable to pay and protect your entitlement to Basic State Pension. If you aren’t in work because you care for children, care for a frail or disabled adult, or are disabled yourself, you can also be credited with some Additional State Pension.

You will probably still build up national insurance credits (and therefore Basic State Pension or single-tier pension) if the following applies:

You are unable to work because of illness or disability.

You care for someone who is ill or disabled. You must receive Carer’s Allowance or care for them at least 20 hours a week.

You claim Child Benefit for a child under 12.

You get Working Tax Credit or a new benefit called Universal Credit.

You are a man who is approaching 65 and has reached the State Pension age for women, but you don’t work or earn very much.

In other situations, periods off work will probably appear as gaps in your national insurance record. This may reduce the amount of State Pension you eventually get. But you need 30 years (35 years from 2016) of national insurance contributions and credits for a full Basic State Pension, so you may not need to worry about filling these gaps if you’ve worked for a certain number of years.

Child Benefit and State Pension

If you have a child under 12 and are not working, claiming Child Benefit could help you qualify for national insurance credits.

These credits could count towards your State Pension. If you or your partner have an individual income of more than £50,000 and one of you is entitled to Child Benefit, the person with the higher income may be affected by a new tax charge called the High Income Child Benefit Charge. You can choose not to receive Child Benefit to avoid the tax bill. If you do this, make sure you still complete the claim forms even though you will receive nothing. This means you’ll still get national insurance credits while you’re not working, which will protect your State Pension.

Income for early retirement

You can’t start getting your State Pension before you reach State Pension age. But if you can’t work because of illness or caring responsibilities, or if your household income is low, you may be able to claim other state benefits instead.

We have more information about getting financial help or you can call our welfare rights advisers.

If you die before State Pension age

Under the current rules, your surviving husband, wife or civil partner may be able to claim bereavement benefits if you’ve paid or been credited with enough national insurance.

Bereavement benefits will be simplified from 2016. Once this change has happened, your husband, wife or civil partner will be able to claim bereavement benefits if they’ve paid just one year or more of national insurance.

In England, Northern Ireland and Wales, partners who aren’t married or in a civil partnership can’t claim bereavement benefits.

But in Scotland, there may be an exception for couples who have lived together since before 4 May 2006. These couples would need to show that their relationship was ‘an irregular marriage by cohabitation with habit and repute’.

If your surviving family members’ income and savings are low, they may qualify for means-tested benefits, or an increase in benefits that they already claim.

For more information about bereavement benefits speak to one of our welfare rights advisers.

Workplace and personal pensions

Workplace pensions are arranged through your employer. These can be company pensions (also called occupational pensions), multi-employer schemes or personal pensions.

The exact details of the pension will vary from employer to employer.

Personal pensions are available to people who don’t have a scheme through work, for example self-employed people.

Automatic enrolment in workplace pensions

A new law being introduced between 2012 and 2018 means that most employees will soon be automatically enrolled in workplace pension schemes, unless they decide to opt out.

You may want to stop your contributions for a while if the cost of cancer is affecting your household income. But think carefully before doing this. Opting out means you lose your employer contributions too, and your eventual pension will be lower.

Bear in mind that the pension scheme may offer an early pension due to ill health and/or life insurance cover as well as a retirement pension. So it might be worth continuing with your payments if you can.

Company (occupational) pensions

If you belong to a company pension scheme, you usually pay a certain amount of your salary into the scheme each payday.

Your employer and the government will usually contribute money to the scheme too.

When you start claiming your pension benefits, you can usually take some of the money as a lump sum (a single payment) and the rest as a regular income. In some cases, you can take the pension benefit as a one-off lump sum without any pension income.

Types of company pension

There are two main types of company pension scheme – defined contribution schemes and defined benefit schemes.

With defined contribution schemes, your own and your employer’s contributions are paid in and invested. Typically, you use the fund that you get back at retirement to buy or provide your pension.

However, if new government proposals go ahead, from April 2015 you will be able to take any amount of your pension savings as a lump sum once you reach the age of 55.

Amounts up to and including 25% will be tax-free, and amounts above this will be taxed at your normal tax rate(s).

With defined benefit schemes, your employer promises to give you a pension when you retire, usually based on your earnings and how long you work at the organisation.

Common examples are final salary schemes and career-average salary schemes, where the pension you get is based on your pay while working.

The new April 2015 rules do not apply to defined benefit schemes and, in most cases, you will not be allowed to transfer to a defined contribution scheme as a way of accessing that flexibility.

Taking time off or reducing your hours

If you get sick pay during a period off work, you could continue to build up your company pension as normal, but this is not always the case. If you’re off work for a prolonged period, your pension may stop building up completely.

If you take time off for caring responsibilities, your pension will be unaffected if you’re using up your holiday allowance. Beyond that, your pension may be affected.

If you cut back your hours and this means you’re paid less, this is likely to reduce the workplace pension you’re building up.

In all the situations above, exactly what happens to your pension rights and when depends on your work contract and the rules of the pension scheme.

To check the impact of time off or reduced hours on your company pension, talk to your employer or the HR (human resources) department at work. To find out how much pension you may get at retirement, check the latest benefit statement from the scheme. You should be sent a statement each year.

Early retirement and workplace pensions

Under government rules, the earliest you can normally start drawing a pension from a workplace scheme is age 55. But you can often start your pension earlier than this if you’re no longer able to work because of ill health.

Most employers can no longer set a normal (compulsory) retirement age. However, workplace pension schemes can still set a normal pension age from which your full pension is payable.

Starting your pension earlier will usually mean your pension is a lot lower. With some schemes (usually salary-related schemes) there are extra benefits if you retire because of ill health.

You can usually take part of the proceeds of your pension scheme as a tax-free lump sum. If you have a life expectancy of less than 12 months, some defined benefit schemes will award you a larger lump sum.

In a defined contribution scheme, you would usually use your pension fund to buy a pension annuity. This is a special type of investment sold by insurance companies where, in exchange for your pension fund, you get an income payable for the rest of your life.

The workplace pension scheme may have arrangements to offer you an annuity. But you always have the option of shopping around and buying your annuity elsewhere to get a higher income. This is particularly worthwhile if you have or have had cancer, because you’re likely to qualify for an impaired-life annuity. This will pay out a higher income than you would normally get.

Alternatively, you can choose to leave your pension fund invested, drawing off part of it on a regular basis to provide an income direct from the fund. This is called income drawdown.

This is only suitable if you have pension savings of £100,000 or more. Choosing income drawdown may enable you to strike a better balance between having a pension now and leaving something for your dependants later on. You may have to move your pension fund out of the workplace scheme into a personal pension if you want to choose income drawdown.

To discuss income drawdown, seek specialist advice from a financial adviser who has a specific pension qualification.

You can also call The Pensions Advisory Service for free on 0845 601 2923.

The government has proposed that from April 2015, people who have reached the age of 55 will be able to draw out their pension savings from a defined contribution scheme in any way they like.

This may be as income (using an annuity and/or a drawdown product), as a series of lump sums or a combination of these.

You can even draw out your entire pension savings in one go.

You will have the right to talk to an adviser who will give you free guidance on your options. Amounts up to and including 25% will be tax-free, and amounts above this will be taxed at your normal tax rate(s).

Impaired-life and enhanced annuities

Some pension providers offer impaired-life or enhanced annuities. An impaired-life annuity pays more to people with particular health problems, including cancer. It is based on your personal circumstances.

Enhanced annuities are offered to people with particular lifestyles, including people who smoke, who may not be expected to live as long. An enhanced life annuity is less tailored to your individual situation. The Money Advice Service has an online tool that can be a good starting point when looking for enhanced annuities. To use this comparison tool, visit moneyadviceservice.org.uk/tables or call the Money Advice Service on 0300 500 5000.

It’s important to shop around for the best deal if you are looking for an impaired-life annuity.

If you’re living with cancer, an impaired-life or enhanced annuity could make a significant difference to your pension. Call our financial guides on 0808 808 00 00 to discuss your situation and hear more about these options.

If you die before claiming a workplace pension

Workplace pensions may provide a lump sum to a person/people you have nominated if you die before claiming the pension.

In a defined benefit scheme, the value of the lump sum is usually calculated as a multiple of your final earnings. In a defined contribution scheme, it will typically be based on the value of the fund you have built up. If you die before you’re 75 and the lump sum is paid within two years of your death, the lump sum can generally be paid without any tax charge. Otherwise, tax charges may apply.

Personal pensions

With a personal pension scheme that you’ve taken out for yourself, or joined through work, you may find it hard to keep the contributions going if you stop working or take time off.

If you stop making contributions, your eventual pension will be smaller. Check whether your personal pension includes something called a waiver of premium benefit. This continues your contributions if you can’t work because of illness.

To check the rules and options for a personal pension, check the scheme’s terms and conditions, or talk to the provider.

To check how much pension you may get at retirement, check the latest benefit statement from the scheme. You should be sent a statement each year.

Retirement due to ill health

If you are not yet 55, you could ask your employer or pension provider if you can retire on the grounds of ill health. This would allow you to take up to 25% of your pension fund as a tax-free lump sum and the rest as pension taxed at your normal rates. This is true for both defined contribution and defined benefit schemes.

If you have under 12 months to live, you can retire on the grounds of serious ill health. With this option, you can usually take your whole pension fund as a tax-free lump sum.

There are other issues you should consider if you’re thinking about these options. Call our financial guides on 0808 808 00 00 for more information.

You might want an estimate of the pension you may get. You can check your annual pension statement from your pension provider. You can also use the calculator on the Money Advice Service website.

Remember that your actual pension may vary from these estimates, depending on:

how old you are when you access your pension

the financial choices you make then

whether you draw out any lump sums before then

your health at the time.

Our financial guides can explain more about this.

If you’ve lost the details of an old pension scheme, the Pension Tracing Service may be able to help you find the contact details.

If your pension savings are small

If you’re aged at least 60 and the total value of all your workplace and personal pension savings is no more than a given limit (£30,000 in 2014–15), you can take the whole amount as a cash lump sum instead of turning it into a pension. You may prefer to do this if you think getting a lump sum would be more useful to you than receiving the money gradually through regular payments. For example, some people choose to invest the lump sum, or use it to pay off their debts. A quarter of the lump sum will be tax-free, but the rest is taxable as income for the year in which you receive it.

Regardless of the value of your total pension savings, you can usually take the proceeds from a company pension as a lump sum if the value is no more than £10,000. A quarter of the lump sum will normally be tax-free, but the rest is taxable as income for the year in which you receive it.

You may also be able to cash in personal pension funds of no more than £10,000 each, but only on three occasions. Certain rules apply and you must be aged at least 60.

To check the value of your pension savings, check your latest benefit statement or talk to the pension provider.

If you’re getting state benefits, the decision whether to take your company or personal pension as a small, regular pension or a lump sum may affect the benefits you get both now and in the future. This can be complicated to work out, so you may want to contact our welfare rights advisers.

Thanks

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